Some companies restoring 401(k) contributions

YLAN Q. MUI, Washington Post

Published 5:30 am, Sunday, April 11, 2010

Backstage at the opera, the latest tragedy is the financial crisis.

The Minnesota Opera's $10 million annual budget got hammered during the low notes of the recession. Ticket sales slumped as people saved money and stayed home, corporations cut back on donations and the stock market wrecked havoc on the opera's endowment. That forced it to do some painful cost-cutting last year — namely, suspending a 3 percent contribution to employee retirement plans regardless of whether workers put money in.

The contribution was a well-loved perk for artists facing curtain call, and Opera chief executive Kevin Smith said he was determined to bring it back. Now, a new state sales tax to help pay for the arts and solid ticket sales have restored Smith's confidence in the future. Starting in January, the opera plans to begin contributing 1.5 percent with the hopes of restoring the full 3 percent by July 2011.

“Things have improved to the point where we feel we can reinvest in employees the way we always wanted to,” he said.

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The opera is part of a wave of firms restoring contributions to employee retirement plans after suspending them in the wake of the crisis, a sign of growing confidence in the country's economic recovery. In a recent study, Fidelity Investments, the nation's largest provider of workplace retirement plans, said about 8 percent of its clients — about 300 companies — had suspended or reduced contributions to employees' 401(k) plans as of July. But the survey found that 44 percent have since reinstated the benefit or plan to do so over the next year.

Under many 401(k) plans, companies agree to match a certain percentage of employee contributions to their retirement accounts, and workers can choose how to invest that money. Beth McHugh, Fidelity vice president for market insights, said she expects the number of companies reviving the contribution to grow as the recovery gains momentum. Typically, large companies are among the first to reinstate the match, with small businesses following.

“It's a good indicator of the employer's confidence in their fiscal future,” McHugh said.

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Vanguard, another large retirement plan provider, said 4 percent of its clients suspended their contributions last year and 1 percent reduced the amount of the match. Since then, about 29 percent of those clients have brought it back at some degree. Another study by the nonprofit Profit Sharing/401k Council of America found that 15 percent of all companies had suspended or reduced their match last year, with 46 percent planning to have reinstated it within the first half of this year.

Council President David Wray said that the cuts were driven by the sharp drop in revenue that many firms experienced during the financial crisis. Companies scrambled to cut costs in response — in many cases by slashing jobs. Contributions to 401(k) plans were also an easy target, Wray said, and firms have suspended the benefit in previous downturns with few consequences.

For workers, the move came at the same time that the stock markets were plummeting, resulting in a double whammy to their retirement accounts. According to Fidelity, its average individual 401(k) balance dropped 27 percent in 2008 to $50,200. But workers largely recouped those gains last year as the average balance rose 28 percent to $64,200.

Many feared that companies would not reinstate 401(k) contributions even after the economy improved. But Wray said that almost all of the firms that had suspended them during the 2001 recession eventually brought them back. Companies have moral and competitive incentives to contribute to workers' retirement, he said.

“All that goodwill would've gone away in a heartbeat if they hadn't done it,” Wray said. “This is a commitment.”

Fidelity reported that more than half of its manufacturing clients have reinstated 401(k) contributions, the most of any sector. About 44 percent of professional and technical services companies and 36 percent of information services firms have brought them back.

Government defense contractor GenCorp, based in Sacramento, suspended its 401(k) benefit Feb. 1, 2009. It had matched with company stock 100 percent of the first 3 percent contributed and 50 percent of the next 3 percent. The company employs 3,000 people in 14 states.

A few weeks ago, the firm notified employees it would reinstate the match in July with a small change: It would be made in cash, rather than stock. Chief Financial Officer Kathy Redd said the firm had always hoped to reinstate the contribution.

Financial services firm Morningstar saved $1.2 million in one quarter by suspending 401(k) contributions. Chief Financial Officer Scott Cooley said the company needed to reduce costs but wanted to avoid layoffs, so it opted for the “shared sacrifice” of cutting the match, he said.

The rebound in the stock markets has eased the pressure on many of Morningstar's clients. So the company began phasing its retirement benefit back in this year, matching up to 50 percent of employee contributions up to 7 percent. Previously, it matched 100 percent. Morningstar had also frozen salaries last year but plans to begin giving moderate raises later this year and hiring for some unfilled positions. Cooley said he eventually hopes to fully restore the match to its former level.

“For us,” he said, “the question was when, not whether we would bring it back.”